Modern organisational theory insists that a sound company strategy is based on short-term profitability for longer-term wealth creation. By far the majority of companies today are probably not following this strategy. Most are focusing on the first component – short-term profitability – arguably at the expense of longer-term wealth creation. Perhaps this is because the dynamic of wealth creation is not fully understood. Indeed, few people in the accounting functions and elsewhere are even aware of how it is calculated. The confusion has been compounded by the fact that wealth creation is seen to be the enhancement of shareholder value ala EVA, and that “wealth created” has become synonymous with shareholder earnings or profits.

Another reason for the short-term profitability focus is the mistaken belief that it automatically leads to longer-term wealth creation. What is not fully appreciated is that longer-term wealth creation and growth can only come from a deliberate change in strategy and focus that encompasses a whole host of strategic and operational issues.

If wealth creation is an important strategic concept, then it is inexplicable why it is seldom measured and accounted for in the normal score keeping in companies. It is, after all, a very simple measurement, being synonymous with value-added and derived simply by deducting outside costs from sales or turnover.

Because value-added is the accounting synonym for wealth creation, it is the obvious, direct link to a sensible long-term strategy. Value-added is the company’s measurable annual contribution to GDP, and therefore a contribution to national prosperity. It is really the only valid and credible measurement of productivity because it embraces all three estates: capital labour and state. The standard measurement of output over input is a profitability measurement encouraging input reduction, rather than an increase in output. This leads to containment rather than growth with all of its implications for national prosperity and unemployment.

Because value-added embraces the three main stakeholders it is the only valid common focus that enhances a sense of common destiny. It is the ideal trigger for a common fate gain-sharing and flexible pay programme.

The final and perhaps overriding power of the measurement lies in its ability to shift behaviour visibly. Being the difference between the product or service the company offers, (measured as sales) and what it has used from others (outside supplies), it is arguably a measurement of what the company’s market has found useful. In other words, it is the company’s contribution to the market and society as a whole. Value-added is therefore a measurement of contribution. It is the only measurement in accounting to do so! But as this value-added is shared between the three contributors (labour, capital and state) it is also the measurement of reward. Again it is the only measurement in accounting to do so. What is obvious to all is that value was created by the contribution in the first place. No other measurement proves so convincingly that contribution creates reward (give and you will receive!). This must and does shift behaviour and focus from taking to giving.

Wealth creation as a concept has to be actively promoted, both as a common focus within the organisation, and also as an accounting benchmark. The wealth creation figure should be elevated in importance, understanding and familiarity far beyond the profit figure. I intend to illustrate in future how both the concept of adding value, and the measurement of value-added can be broken down into components that provide a very useful operational excellence methodology far superior to many of the “franchised” packages available today.

The focus of this article however, is to show how mission, vision, statements of purpose and company values, can be aligned to the value-added accounting process. And also, of course, whether these statements can be aligned to longer-term wealth creation. In the last article in Management Today, I pointed out that there has been a perceptible shift in company mission and vision declarations in past decades. Fifteen to 20 years ago, these statements were direct in their intent of maximising return for the shareholders. Today one would be hard-pressed to find any reference to “profit” in these statements. The popular idiom is to focus on the value to society of the product or service being offered and references to “reward” will encompass all the major stakeholders. For the purpose of this discussion it is perhaps not relevant to draw fine distinctions between mission, vision and statement of purpose. All, in one way or the other, reflect “why we are here” and “where we intend to be”.

Because, as we have shown, value-added (or wealth creation) is the only measurement in accounting that reflects contribution, it is axiomatic that it will also measure one’s mission if that mission is a statement of contribution. For example, if your mission states “We serve through the building of homes” then value-added will measure in monetary terms what the value of that contribution was. This measurement may not agree with your own value judgement, but that is not the point. Teachers don’t earn as much as pop stars although we may “judge” them to have higher value.

The simple but real, monetary measurement of contribution afforded by the value-added statement, and therefore reflecting the contributing mission of the company, means that it can be a very tangible focal point for all in the company. Embellished with the full value-added statement and is sub-scores, one can link all operational activities, from sweeper to MD, to the mission statement.

But there is one major stumbling block. Too many mission statements or statements of purpose, are the outcome of an expensive exercise in flip-charting and brown wallpapering. They end up being a barely comprehensible paragraph or two of sentences without verbs that can seldom be repeated with understanding and conviction by more than a handful of staff. What then normally follows is a major brain washing exercise embracing industrial theatre, videos, parties, pamphlets and chewing gum paraphernalia to try and solicit empathy and commitment to these laudable goals. What is missed is that if it’s not in the heart it will not long be in the mind. “They say one thing but do the other” is the most frequent response when one tries to convince employees that the company is indeed market-driven, there to serve, and has a benevolent intention.

It is because short-term profitability is pursued at the expense of longer-term wealth creation and growth. It is because customer service is not seen1,163.19 as an end in itself, but as a means to the end of self-enrichment.

Peter Drucker once said: “Profits are the cost of staying in business”. It is indeed so. Profit is the means by which we attract and sustain capital in contributing to society through a product or service that is needed or wanted. But it is only one of the means. Salaries and wages are another.

Until we find the model in business that truly reflects this way of being in business, the real behaviour of companies will be at odds with their mission statements. The various “models” of business, and transforming from one to the other will be examined more closely in a future article.